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OPERATING COSTING
Page 2


OPERATING COSTING
What is operating costing?
•
Operating costing method is one designed to ascertain 
and control the costs of the undertakings which do not 
produce products but which render services
•
Also known as service costing
•
Operation costing is the cost of rendering services
•
It is the cost of producing and maintaining a service
•
Industries using operating costing do not produce 
tangible poducts ; but useful service is rendered; for 
eg-transport services, utility services like hospitals, 
canteens etc, distribution services like supply of 
electricity, gas etc.
Page 3


OPERATING COSTING
What is operating costing?
•
Operating costing method is one designed to ascertain 
and control the costs of the undertakings which do not 
produce products but which render services
•
Also known as service costing
•
Operation costing is the cost of rendering services
•
It is the cost of producing and maintaining a service
•
Industries using operating costing do not produce 
tangible poducts ; but useful service is rendered; for 
eg-transport services, utility services like hospitals, 
canteens etc, distribution services like supply of 
electricity, gas etc.
Service Costing
Service or operating cost is the cost of providing service. The 
term service costing is applied to describe the system used to 
find the cost of performing a service such as transport, gas or 
electricity.
•
Services rendered to customers are of unique and 
standardised type
•
Distinction between fixed cost and variable cost is of special 
importance as the scale of operations considerably affects the 
cost per unit of service rendered
•
A large chunk of total capital invested in fixed assets and 
relatively less working capital is required
•
The method of costing is different from that used in connection 
with production and difference lies mainly in the manner of 
accumulating the cost data and finally in its allocation to cost 
units
Page 4


OPERATING COSTING
What is operating costing?
•
Operating costing method is one designed to ascertain 
and control the costs of the undertakings which do not 
produce products but which render services
•
Also known as service costing
•
Operation costing is the cost of rendering services
•
It is the cost of producing and maintaining a service
•
Industries using operating costing do not produce 
tangible poducts ; but useful service is rendered; for 
eg-transport services, utility services like hospitals, 
canteens etc, distribution services like supply of 
electricity, gas etc.
Service Costing
Service or operating cost is the cost of providing service. The 
term service costing is applied to describe the system used to 
find the cost of performing a service such as transport, gas or 
electricity.
•
Services rendered to customers are of unique and 
standardised type
•
Distinction between fixed cost and variable cost is of special 
importance as the scale of operations considerably affects the 
cost per unit of service rendered
•
A large chunk of total capital invested in fixed assets and 
relatively less working capital is required
•
The method of costing is different from that used in connection 
with production and difference lies mainly in the manner of 
accumulating the cost data and finally in its allocation to cost 
units
Cost Unit-Selection of cost unit is 
different in operating costing
SNO
NAME OF THE 
UNDERTAKING
COST UNIT
1
Passenger transport
Passenger km/mile
2
Goods transport
Ton mile/km
3
Hotel lodging
Per bed, per person, per day
4
Hospitals
Per bed, per day, per operations, per patient, 
per test, per x-ray etc.
5
Electricity
Kilowatt-hour
6
Boiler house
Kilograms of streams supplied
7
Cinema theatre
Man-show
8
Canteens
Meals served, cups of tea sold
9
Gas works
Per 100 cubic ft produced
10
Water supply
Per 1000 gallons
Page 5


OPERATING COSTING
What is operating costing?
•
Operating costing method is one designed to ascertain 
and control the costs of the undertakings which do not 
produce products but which render services
•
Also known as service costing
•
Operation costing is the cost of rendering services
•
It is the cost of producing and maintaining a service
•
Industries using operating costing do not produce 
tangible poducts ; but useful service is rendered; for 
eg-transport services, utility services like hospitals, 
canteens etc, distribution services like supply of 
electricity, gas etc.
Service Costing
Service or operating cost is the cost of providing service. The 
term service costing is applied to describe the system used to 
find the cost of performing a service such as transport, gas or 
electricity.
•
Services rendered to customers are of unique and 
standardised type
•
Distinction between fixed cost and variable cost is of special 
importance as the scale of operations considerably affects the 
cost per unit of service rendered
•
A large chunk of total capital invested in fixed assets and 
relatively less working capital is required
•
The method of costing is different from that used in connection 
with production and difference lies mainly in the manner of 
accumulating the cost data and finally in its allocation to cost 
units
Cost Unit-Selection of cost unit is 
different in operating costing
SNO
NAME OF THE 
UNDERTAKING
COST UNIT
1
Passenger transport
Passenger km/mile
2
Goods transport
Ton mile/km
3
Hotel lodging
Per bed, per person, per day
4
Hospitals
Per bed, per day, per operations, per patient, 
per test, per x-ray etc.
5
Electricity
Kilowatt-hour
6
Boiler house
Kilograms of streams supplied
7
Cinema theatre
Man-show
8
Canteens
Meals served, cups of tea sold
9
Gas works
Per 100 cubic ft produced
10
Water supply
Per 1000 gallons
Classification of Costs
1.Fixed costs or standing charges
2.Semi-variable costs or manufacturing charges
3.Variable costs or operating-running charges
Characteristics
?
These undertakings render unique services to their 
customers
?
They invest large proportion of their capital in fixed 
assets
?
The requirement of working capital comparatively is less
?
The operating cost is divided into fixed and variable and 
they are of utmost importance
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FAQs on PPT - Operating and Service Costing - Cost Accounting - B Com

1. What is operating costing?
Ans. Operating costing is a method of cost allocation used to determine the cost of providing a service or producing a product. It involves identifying and allocating all the costs associated with the operations and activities of a business, including direct costs such as materials and labor, as well as indirect costs such as overhead expenses.
2. What is service costing?
Ans. Service costing is a specific type of operating costing that focuses on determining the cost of providing services. It involves identifying and allocating costs that are directly related to delivering a particular service, such as labor costs, material costs, and overhead expenses. Service costing helps businesses understand the cost structure of their service offerings and make informed decisions about pricing and profitability.
3. What are the benefits of operating and service costing?
Ans. Operating and service costing provide several benefits to businesses. Firstly, it helps in estimating the cost of providing services or producing products accurately, which is essential for pricing decisions. It also helps in identifying cost-saving opportunities and improving cost efficiency. Additionally, operating and service costing provide valuable insights into the cost structure, helping businesses optimize their resource allocation and improve overall profitability.
4. How is operating costing different from service costing?
Ans. Operating costing is a broader concept that encompasses all costs associated with the operations of a business, including both service-related costs and costs related to the production of goods. On the other hand, service costing is a specific type of operating costing that focuses solely on determining the cost of providing services. While operating costing considers costs related to both services and products, service costing is limited to service-specific costs.
5. Can you give an example of operating and service costing in a real-life scenario?
Ans. Sure! Let's consider a hotel as an example. In operating costing, the hotel would allocate costs such as employee wages, utility bills, cleaning supplies, and maintenance expenses. These costs would be allocated to various departments like housekeeping, front desk, and food and beverage. In service costing, the hotel would focus specifically on the costs associated with providing services, such as the salaries of front desk staff, concierge services, and room service operations. This allocation of costs helps the hotel understand the profitability of different services and make informed decisions about pricing and resource allocation.
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